EUR/USD pressure deepens as Fed rate hike expectations rise

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Ed expectations keep euro under pressure

U.S. data strengthens dollar outlook

U.S. CPI rose 0.4% m/m and 3.4% y/y in August, while core inflation stood at 2.4% y/y. PPI also increased by 0.4% m/m and 5.4% y/y. The case for a more hawkish Fed was further reinforced by August payroll growth of 162K, a 4.1% unemployment rate, and a strong ISM Services PMI reading of 55.4, with the prices component climbing to 72.6. As a result, the dollar continues to benefit from expectations of tighter monetary policy, elevated Treasury yields, and safe-haven demand amid ongoing tensions in the Middle East.

ECB tightening offers limited support to euro

The backdrop for the euro is more mixed. On September 10, the ECB raised all three key policy rates by 25 bps, lifting the deposit facility rate to 2.50%, the main refinancing rate to 2.65%, and the marginal lending facility rate to 2.90%. The move reflected renewed inflation concerns, largely driven by energy prices. Preliminary eurozone inflation accelerated from 2.9% to 3.3% y/y in August, while the energy component surged by 14.3%.

The ECB now projects average inflation at 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. At the same time, the eurozone economy has shown some improvement compared with a few months ago. Second-quarter GDP growth was revised to 0.6% q/q and 1.2% y/y, while the August Composite PMI rose to 52.1. However, weakness in parts of the economy, including a 1.1% m/m decline in German industrial production in July, limits the ECB’s ability to pursue an aggressive tightening cycle.

From a relative monetary policy perspective, the balance has therefore shifted temporarily in favor of the dollar. The ECB’s latest rate hike has already been largely priced in, while expectations for Fed tightening continue to rise ahead of the September 16 meeting. Futures now imply an approximately 87–90% probability of a 25 bps hike, well above the levels seen at the start of the month.

Markets are also leaving room for additional ECB tightening later in the autumn, but the key difference is that U.S. rate expectations are currently moving much faster. For EUR/USD, this means that even relatively hawkish ECB guidance has so far failed to offset the widening expected rate differential in favor of the United States.

EUR/USD tests critical support zone

The break below the 1.1620–1.1600 support area, followed by a move under 1.1570, has significantly weakened the pair’s near-term technical outlook. At the same time, the proximity of the 1.1520–1.1500 support zone could encourage some profit-taking on short positions, particularly ahead of the Fed decision. Any rebound, however, as noted in EUR/USD extends decline as U.S. inflation becomes next key test, may remain capped by resistance in the 1.1570–1.1590 area, where selling interest could re-emerge.

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